Fraud: It’s Much Bigger Than Goldman Sachs

Goldman Sachs was charged with fraud last week by the Securities and Exchange Commission. The investment bank says the charges are “unfounded in law and fact.” Regulators allege “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” SEC Enforcement Director Robert Khuzami said in a statement. In other words, Goldman and a hedge fund client put together a ball of sub-prime crap designed to fail and bet against it. Goldman also took out insurance on those same mortgage backed securities from AIG–yes, the same AIG taxpayers bailed out to the tune of $180 billion. Goldman was paid a total of nearly $13 billion from AIG at the direction of Treasury Secretary Tim Geithner. What a mess and it is going to get much worse before it gets better.

Plaintiff attorneys are preparing for a deluge of future lawsuits written about in this recent Reuters article: The SEC’s charges against Goldman are already stirring up investors who lost big on the CDOs, according to well-known plaintiffs lawyer Jake Zamansky. “I’ve been contacted by Goldman customers to bring lawsuits to recover their losses,” Zamansky said. “It’s going to go way beyond ABACUS. (name of Goldman security in question) Regulators and plaintiffs’ lawyers are going to be looking at other deals, to what kind of conflicts Goldman has.” (Click here for the full Reuters story.) Also, the UK and German governments are asking for their own investigation into Goldman Sachs deals.

If you think this was the only shady deal dreamed up by Wall Street banks, you have another thing coming. All of the big banks have been selling securities called derivatives for at least two decades. Derivatives are usually bundles of debt. There are derivatives for mortgages, car loans, credit cards, student loans and all types of government debt, to name a few. Derivatives are complex, but when it comes right down to it, you can sum them all up as debt bets. Read more.

"So, Goldman is a serial arsonist that has turned betting against its clients' interests into a science. The Times article makes it clear that shorting subprime and luring gullible investors into the trap, was standard operating procedure. Goldman's CEO Lloyd Blankfein dismisses the criticism with a wave of the hand saying, "They were sophisticated investors," which is the same as saying "buyer beware". It's worth noting that shorting subprimes exacerbated the pain in housing by creating incentives for originators to issue more mortgages to people with poor credit. This prolonged the housing boom and deepened the recession when the bubble finally burst. The eventual downturn was largely engineered by Wall Street.

Still, this doesn't explain why the SEC chose Goldman over the other investment banks that were engaged in the same type of activities. Keep in mind, the Abacus CDO deal only cost about $1 billion, small potatoes compared to the $100 billion hijinx at Lehman Bros. So, why isn't Dick Fuld in leg-irons?

This is not a defense of Goldman. (They should throw the book at them) But Goldman is no guiltier than anyone else. So, what gives? The public is not ready to answer that question because they're too swept up in schadenfreude; i.e., malicious pleasure in the misfortune of others. Everyone is savoring this intoxicating moment of payback where the deep-pocket bunko-artists finally get their comeuppance. But there may be more to this than meets the eye, part of a strategy to pass Obama's reform bill or to give him a Teddy Roosevelt-makeover and to boost the Dems' prospects for the upcoming midterms. After all, the Rubin-clones, Geithner and Summers, still haven't gotten their pink slips. And Obama's position on the main issues-- "Too big to fail", OTC derivatives, off-balance sheet operations, securitization, ratings agencies and CFPA--hasn't changed at all. Wouldn't that be the logical place to start if Obama was serious about cleaning up Wall Street and reforming the system? Instead, all of the attention is focused the headline-grabbing slapdown of Goldman? Sorry, it doesn't pass the smell test.

Many of the other banks were engaged in the same shenanigans as Goldman. Yves Smith at Naked Capitaism cites one example:

"The Wall Street Journal reports that Dutch bank Rabobank has filed a suit alleging that Merrill Lynch engaged in the same type of behavior as Goldman did with John Paulson, namely, devising a CDO on behalf of a hedge fund who was using it to take a short position, and not disclosing that fact to investors in the deal."

IBETT
It is called, hypothetical accounting.
I find it interesting that Martha Stewart was jailed for an
'insider trading/lie', and these dogs are still raking in big $$. It all depends who has your back.
America has become one giant, pathetic joke!

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